Series 66 Retirement Plans, Taxes, and Estate Basics

This article covers the retirement, tax, and estate half of the Client Recommendations and Strategies section. The advisory-judgment half (client types and profiles, capital market theory, portfolio strategy, trading, and performance measurement) lives in our companion guide to Series 66 client recommendations. New to the exam itself? Start with what the Series 66 is for format, cost, and registration.

The frame for everything below:

The four NASAA sections weight in at 8%, 17%, 30%, and 45%; roughly half of the 30-question Client Recommendations block draws on the material below.

What tax fundamentals does the Series 66 test?

The exam tests individual income tax at the working-adviser level: enough to explain why a recommendation makes sense after taxes, not enough to prepare a return.

Capital gains. A position held for 12 months or less produces a short-term gain, taxed at ordinary income rates. Hold it longer than 12 months and the gain becomes a long-term capital gain, taxed at preferential rates (0%, 15%, or 20% depending on income). Net capital losses offset gains first, then up to $3,000 of ordinary income per year, with the excess carrying forward. Qualified dividends (from most domestic corporations, held long enough to qualify) get the same preferential rates; nonqualified dividends stay at ordinary rates.

Cost basis and the step-up. Basis is what you paid, adjusted for splits, reinvested dividends, and returns of capital; gain or loss equals sale price minus adjusted basis. Two transfer rules are heavily tested: gifted securities carry over the donor’s basis, while inherited securities receive a step-up in basis to fair market value at death. The step-up is why holding a highly appreciated position until death erases the built-in gain entirely.

Marginal brackets drive recommendations. The marginal bracket is the rate on the last dollar of income. It decides whether municipal bonds beat corporates after tax and whether a client should pay tax now (Roth) or later (traditional). In most which-is-better questions, current bracket versus expected future bracket is the lever.

The alternative minimum tax, at the awareness level. The AMT is a parallel calculation that adds back certain deductions and preference items (private activity bond interest is the classic example); the taxpayer pays the greater of the two. You need the concept and the triggers, not the computation.

Retirement distributions and government benefits. Distributions from tax-deferred accounts come out as ordinary income. Large withdrawals can also make more of a client’s Social Security benefit taxable and push Medicare premiums higher, which is why withdrawal timing shows up in recommendation questions.

Entity taxation in one line each. C corporations pay tax at the entity level, and shareholders pay tax again on dividends: double taxation. S corporations and partnerships are passthroughs: no entity-level tax, income flows straight to the owners’ returns. Trusts compress brackets: retained income hits the top rate at a very low income level; distributed income is taxed at the beneficiary’s own rate.

Gift and estate tax, at the awareness level. Each person can give an annual exclusion amount per recipient per year with no gift tax consequences; larger gifts reduce a lifetime exemption unified with the estate tax exemption. Transfers to a U.S. citizen spouse and gifts to qualified charities are unlimited. Know the architecture: the dollar amounts are indexed each year, and the exam does not hinge on them.

Which retirement accounts do you need to know?

Every account follows the same grid: money in, growth, money out, plus the one detail NASAA likes to test. Start with the traditional IRA row and read down.

The qualified versus nonqualified split matters more than any single row. Qualified plans (401(k), 403(b), pensions) meet IRS requirements, cannot discriminate in favor of highly compensated employees, and carry ERISA creditor protection. Nonqualified plans (deferred compensation arrangements, 457 plans, and executive bonus plans that buy life insurance on a key employee) can discriminate freely, but the benefit is an unsecured promise, exposed to the employer’s creditors until paid.

Two distribution rules round out the section. Tax-deferred accounts eventually force money out: required minimum distributions (RMDs) begin in the owner’s early 70s (age 73 under current law), based on the prior year-end balance and life expectancy. Roth IRAs are the exception: no RMDs during the owner’s lifetime, which makes them a wealth transfer tool as much as a retirement account. Also flashcard-worthy: anyone can convert a traditional IRA to a Roth regardless of income; the converted amount is ordinary income in the conversion year.

How does ERISA show up on the exam?

ERISA is the federal law governing private-sector employer retirement plans. The first gotcha is scope: government and church plans are generally exempt. The second is the fiduciary definition, which is functional: anyone with discretionary authority or control over plan management or plan assets, or who gives the plan investment advice for compensation, is a fiduciary, whatever their business card says.

Plan fiduciaries owe four duties: loyalty (act solely in the interest of participants and beneficiaries), prudence (measured against a prudent expert, not a prudent amateur), diversification (spread plan investments to minimize the risk of large losses), and adherence to the plan documents. On the investment side, that means offering a menu of diversified options, watching fees, and monitoring the lineup over time.

The safe harbor for participant-directed plans is tested in words. When a plan offers at least three diversified options with materially different risk and return profiles, lets participants move money among them at least quarterly, and gives them enough information to make informed decisions, fiduciaries are not liable for losses caused by a participant’s own choices. The shield covers those choices only: fiduciaries must still prudently select and monitor the menu itself.

An investment policy statement supports that process: a written document laying out the plan’s objectives, asset allocation targets, criteria for hiring and firing managers, and performance benchmarks. ERISA does not require one, but it is the standard evidence of a prudent, documented process.

Prohibited transactions are the last piece. A plan generally may not sell to, lease to, lend to, or borrow from a party in interest (fiduciaries, service providers, the employer), and a fiduciary may not deal with plan assets for their own benefit (self-dealing) or accept kickbacks. When a question shows a trustee steering plan assets toward a fund that pays the trustee a fee, self-dealing is the answer.

What special accounts are tested?

Education accounts come as a pair, and the contrast is the test point. A 529 plan is state-sponsored, accepts large contributions (each state sets its own ceiling), has no income limit on contributors, and pays out tax-free for qualified education expenses. The owner, not the beneficiary, keeps control, and the beneficiary can be changed to another family member without penalty. A Coverdell education savings account is the small, flexible sibling: a low annual per-beneficiary cap, income limits on contributors, broader investment choices, and a use-by-age-30 requirement. The exam-day shorthand: 529s are big and owner-controlled; Coverdells are small, flexible, and age-limited.

Custodial accounts under UGMA and UTMA are irrevocable gifts to a minor. The custodian manages the money as a fiduciary, but the assets belong to the child, and control transfers automatically at the age of majority (18 to 25, depending on the state). UTMA accepts nearly any kind of property, including real estate, while UGMA is limited to financial assets. The tax angle is the kiddie tax: a child’s unearned income above a small annual threshold is taxed at the parents’ marginal rate (generally for children under 19, or under 24 if full-time students), which blunts the strategy of parking income-producing assets in a child’s name.

Health savings accounts pair with high-deductible health plans and carry the only triple tax advantage on the exam: contributions are deductible, growth is untaxed, and withdrawals for qualified medical expenses are tax-free. Funds roll over, stay with the individual between employers, and can be invested. After age 65, non-medical withdrawals lose the penalty and are simply taxed as ordinary income, so an old HSA behaves like a traditional IRA with a medical bonus. Flexible spending accounts are the opposite on nearly every axis: employer-sponsored, funded pre-tax, not portable, not investable, and forfeited at year end under use-it-or-lose-it (grace periods and small carryovers exist, but forfeiture is the default the exam expects).

Which ownership and estate techniques appear?

Titling questions test who controls property during life and where it goes at death. Three joint forms carry most of the weight:

Transfer-on-death (TOD) registrations on brokerage accounts and pay-on-death (POD) designations on bank accounts move assets to named beneficiaries at death and skip probate; the owner keeps full control and can change the beneficiary at any time. The rule the exam loves: a beneficiary designation overrides the will. If the will leaves everything to the children but the IRA still names an ex-spouse, the ex-spouse takes the IRA.

Trusts and wills reduce to one-liners. A will directs assets at death but goes through probate, a public court process. A revocable (living) trust avoids probate, but the grantor keeps control, so the assets stay in the taxable estate. An irrevocable trust removes assets from the estate and can shield them from creditors, at the price of giving up control. A testamentary trust is created by a will and takes effect only at death.

A qualified domestic relations order is a court order issued in a divorce that divides a qualified employer plan, such as a 401(k) or a pension. The alternate payee (usually the ex-spouse) takes their share without the 10% early withdrawal penalty but pays ordinary income tax on it. IRAs are divided differently, through a transfer incident to divorce, so an answer choice applying this order to an IRA is a trap.

Donor-advised funds close the list. A donor makes an irrevocable contribution to a fund run by a sponsoring organization, takes the deduction immediately, and then recommends grants to charities over time. Donating appreciated securities skips the capital gains tax on the appreciation, which is the detail questions single out.

How should you study this half of the section?

This material is flashcard territory. Almost every testable fact fits on one card: tax in, growth, and tax out for each account; the four ERISA duties; which titling forms skip probate; 529 versus Coverdell; HSA versus FSA. Build the deck once, review it on a schedule, and the questions turn into retrieval instead of reasoning. Our Series 66 flashcards guide shows how to structure the deck, and the Series 66 cheat sheet compresses these tables into a one-page review for the final week.

Then pressure-test it with a Series 66 practice test and watch these facts get dressed up as client scenarios. The stem may run six lines, but the answer is still “Roth money comes out tax-free” or “the beneficiary form beats the will.” Once the patterns are automatic, this half of Client Recommendations is some of the most reliable points on the exam.